Wage and Price Controls: 25 Years Later

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By Herbert Stein

Twenty-five years ago today President Nixon came down from Camp David and announced his new economic policy to the nation. The plan included freezing all prices and wages for 90 days, stopping gold payments, imposing a 10% surcharge on imports and cutting various taxes and expenditures. I don't propose to retell the story of that announcement, which seemed so dramatic at the time but is memorable now only to the few who were direct participants. Instead, I would like to make some observations about the experience that may well be useful today.

Even after 25 years I am amazed by how little we looked ahead during that exciting weekend at Camp David, when we (the president, really) made those big decisions. What would happen after the 90 days? I don't remember any discussion of that. We all assumed that the comprehensive freeze would not last beyond the 90 days. Some people, at least, assumed that we would then fall back to what used to be called "some kind of income policy," meaning moral suasion addressed to the largest labor unions and businesses. But that idea was not raised.

As it turned out, we were in the price and wage control business not for 90 days but for nearly 1,000. We were in the business of controlling energy prices for much longer. Would the Nixon team have embarked upon its controls if we had foreseen that? Was that foreseeable? Perhaps is was not a certain outcome, but it was surely a possible one. Probably the whole idea of the controls was so alien to us that we could not imagine that we would be living with them for very long. About two months later, when then-Treasury Secretary George Shultz and I gave Mr. Nixon the suggested plan for controls to follow the 90-day freeze, the president said, "If this baby gets too strong we can strangle it in its cradle." He was wrong.

We had created a system tens of millions of people depended upon. Sometime in the fall of 1971, when I was working on the plans for what would follow the freeze, a Canadian economist sent me these lines from Macbeth: "I am in blood/ Stept in so far that, should I wade no more,/ Returning were as tedious as go o'er." This was all too apt.

Some people at Camp David had a theory of what we were doing with the 90-day freeze. The theory was that the inflation then under way (about 4% a year) was propelled by expectations of inflation, not by underlying demand and supply conditions. The 90-day freeze would shake those expectations, and the economy would then subside into price stability. It was a rather flaky theory, and we were not prepared for the possibility that it was wrong.

The story of closing the gold window was only a little different. At Camp David we decided that we wanted to get the exchange value of the dollar down. Closing the gold window and imposing a surcharge were ways to do that. But how much did we want to get the dollar down? And did we want to keep it at its new level indefinitely, or did we want to provide for readjustments? If we wanted an adjustable-rate system, what would the rules be? Or did we want exchange rates to float freely? Some at Camp David had answers to these questions, but they were never discussed.

After Camp David we went through the process of answering these questions. It took until the end of 1971 to determine a new set of exchange rates. During 1972 an effort was made to establish a system for rate adjustments. And in 1973 we moved to a floating rate. The difference from the price-control case was that once we had made the decisions to freeze prices, there was no way out except to get back slowly and uncomfortably to where we had been before.

I describe the incidents of that weekend in August 1971 because the are but one dramatic example of a failure to look ahead. "Looking ahead" means something more than sketching out the most comfortable, or even the most probable, future scenario. It means recognizing that even the most probable forecast is uncertain, and preparing for alternate scenarios. Defined in this way, failure to look ahead is extremely common in government policy making.

The Bay of Pigs venture and various injections of troops into Vietnam are other good examples of failure to look ahead. The decision to launch Medicare is also an important case. The Johnson administration had estimates of the program's future cost, but these estimates were highly uncertain. There was no preparation in the public mind, or in policy, for the possibility that costs would grossly exceed the estimates. We are still struggling with that problem. Ronald Reagan's decision in 1980 to make a big tax cut the centerpiece of his election campaign is yet another example of shortsightedness. His camp had several theories about what would happen if the tax cut was enacted, but had no plan for when none of the theories turned out to be correct, as was the case.

All of this raises questions about what is going on today. We are about to "end welfare as we know it," and the new policy has some estimates of how many fewer unmarried teenagers will have babies and how much money states will provide for employment, child care and other paths to self-reliance. Possibly someone has explicit estimates of such things, although I have never heard of them. But does anyone have a plan for what we should do if the assumptions turn out to be wrong?

Finally, we now have Republican proposals for big tax cuts, and also Democratic proposals for tax cuts, although smaller ones. Have the proponents of these tax cuts looked ahead, with due awareness of the uncertainties, to the consequences not only for Jan. 20, 1997, or even for the year 2002 but also for 2020? Perhaps there are good answers to these questions. I hope so.